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Attorney-Client Privilege in Transactional Practice

By Katherine Kunz
on November 14, 2018
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Transactional attorneys may not always be as attuned to matters of privilege as are litigators, who must often explicitly classify materials as “privileged” or “work product” during a dispute’s discovery process. Nevertheless, a transactional attorney’s proactive steps in safeguarding attorney-client confidentiality can be critical to keeping the client protected should a dispute arise after a transaction.

Who is the client?

First, transactional attorneys must keep a clear understanding of who their client is to maintain that client’s privilege, particularly if the client is a corporate entity. Corporate privilege will generally belong to the corporation and not to its employees. A corporation must act through its representative, however. Federal and state law may differ as to who within a corporation is empowered to trigger attorney-client privilege. Federal law, and many states, follow the “subject matter” test, where corporate attorney-client privilege applies to representatives with authority to obtain or act on legal advice, as well as to any other employee who makes or receives a confidential communication for the purpose of obtaining legal advice while acting in the scope of employment. Other states employ the “control group” test for corporate privilege, where only a member of management with authority to take part in decisions on the matter in question can trigger the privilege. Be clear on the law in your jurisdiction, so that you can advise your client on how to keep privileged communications secure within the organization.

If the transaction involves simultaneous representation of different corporate entities, be aware of the possibility of conflict of interest and secure appropriate waivers—or, possibly, separate counsel for each entity—if needed. Corporate parents and subsidiaries are generally viewed as separate legal entities. When a parent corporation and its subsidiary differ over whether to invoke attorney-client privilege, a court may be asked to determine which entity may assert the privilege. This analysis turns in part on whether the parent and subsidiary are joint clients of their legal counsel or merely one client.

What material is privileged?

Transactional clients may expect every non-public piece of information about a deal to be “privileged” simply by virtue of an attorney’s involvement. While attorney-client privilege protects facts contained in attorney communications, a client cannot protect a material fact with privilege merely by communicating it to an attorney. If the purpose of a communication is commercial rather than legal advice, that communication may not be privileged. Attorney assistance with specific commercial responsibilities, like responses to audit letters, may be construed as business and not legal work.

In practice, determining whether a communication amounts to “business” versus “legal” advice can be challenging, particularly where a transactional attorney may be acting in a dual role as a business advisor and lawyer. While some jurisdictions (like New York) require that a privileged communication be “primarily or predominantly” legal rather than commercial in nature, others (like Texas) have not. In Texas, if a communication is made “to facilitate the rendition of legal services,” that communication will likely be privileged whether its “primary” purpose is legal or commercial. Regardless of which standard applies, transactional attorneys should be clear as to whether they are performing in a commercial or legal role in any given moment, and accordingly keeping legal communications isolated from business communications.

Who can waive privilege?

Model Rule of Professional Conduct 1.6 outlines the importance of maintaining client confidential information: “A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation,” or the information is subject to one of several exceptions outlined in the Rule, which generally pertain to potential crime, bodily harm or other extreme circumstance. Absent one of these exceptions, an attorney must maintain his or her client’s privileges, unless the client authorizes a waiver.

Where the corporation is the client, “who” can authorize a waiver becomes more complicated. Within a corporate structure, multiple employees may take different views toward maintaining a privilege. Typically, the corporation itself (rather than any individual employee or officer) will hold the privilege, and the entity’s board of directors or another governing body would determine waiver, rather than any individual officer or director.

When a corporation changes control, the successor in corporate interest may be the holder of the privilege if control of the corporation has also changed hands. If a corporation is dissolving or the successor is acting as a liquidator, there is typically no ongoing privilege: the end of a corporation marks the end of its privilege.

How can privilege be waived?

Privilege may be waived by voluntary disclosure to a third party, in certain circumstances. Under federal law, the unauthorized disclosure of privileged attorney-client communications will not generally result in a waiver of the attorney-client privilege. However, a corporation may be deemed to have ratified an otherwise unauthorized disclosure if it fails to discover and correct the disclosure in a timely fashion. Make sure your clients’ employees are clear not only on what constitutes privileged material but also to whom that material may appropriately be disclosed in order to maintain the privilege.

Email is a particularly fraught area for disclosure of privileged material. While it is subject to discovery like any other communication, people think of it as a private and confidential communication format, which may lull your client’s employees into drafting emails containing confidential or privileged information without appreciating the concomitant risks. Forwarding communications that had been maintaining a privileged subject matter or privileged core of recipients to outside persons waives its privilege. If the corporation can show that the disclosure was inadvertent, it still may be able to claim the right to protect the privilege, though it may need to demonstrate that reasonable precautions were taken to prevent disclosure, including a minimum level of email security (such as a password requirement and/or encryption).

Communications with agents and independent contractors can create a different set of privilege pitfalls for the corporate client. Generally, a corporation maintains its privilege over material disclosed to an agent, though it may depend on the agent’s role (if any) in assisting the attorneys serving the client. However, some jurisdictions require the agent’s involvement to be nearly indispensable or to serve some specialized purpose in facilitating attorney-client communications to warrant protection.

Privilege is also generally maintained over information disclosed to independent contractors, though it may be subject to the contractor being deemed “functionally equivalent” to the corporation’s employees. To avoid confusion (or future litigation), consider implementing a written retainer agreement that establishes the nature of the attorney-client privilege between in-house counsel and the client’s agent or independent contractor, and document that party’s actions in furtherance of legal assistance.

Conclusion

Transactional attorneys may act as both commercial and legal counselors during a deal. Being mindful of privilege pitfalls that may transpire while doing so is not simply a matter of good lawyering, but will also keep your client in the best strategic position possible with regard to its privileged material should any future litigation arise.